Dilemma facing financial services industry

Banks and other financial service providers have for years cared about their reputation, posing as a guarantor of stability to whom depositors would be prepared to entrust their funds. However, this also means slower adaptability to customer needs, a price that used to be payable for this stability. This article explores the significant transformation of the financial services industry we are currently experiencing as well as future strategies.

By breakfast tomorrow!

Today’s customers are no longer satisfied with the old-fashioned principles of providing services. Easy and fast ways of receiving services have become far more important criteria than before. In these circumstances it is only natural that many FinTech start-ups are offering innovative financial services and the regulators are taking steps to accelerate implementation of the new services, causing the providers of traditional financial services to allow open access to their customer information infrastructure.

In Europe, this development is strongly influenced by the latest amendments to the payment services directive (PSD2), which are in fact throwing financial service providers on the horns of a dilemma: “Either you innovate and meet the needs of today’s customers or you give up some of your service offerings to other firms who are able to deliver!”

Future strategy alternatives

How do the financial service providers view all this? This is clearly the point of no return, with FinTechs having won a high profile and customer base in many service areas such as payments, mutual loans etc. It is also clear that a corporate culture that has taken decades to build will find it very difficult to reorient from stability to innovation at short notice. The financial service providers are now forced to choose one of the available future strategies for developing their own services and integrating FinTech services:

Introduce the minimum changes required by law then wait to see what happens next and develop their own services gradually. This strategy is the easiest to implement in organisations that are very stable and not too flexible. Some customers might appreciate maintaining this stability, yet it is also clear that FinTechs would gradually take over some of the services, and so some of the customer communication and existing revenue stream would be lost.

Not only introduce the required changes but do this proactively by promoting the integration of potential business partners. This will make the new services available to customers as soon as possible, while at the same time giving up control and letting some of their revenue flow away faster. In the short term, this can help them keep their customer base and buy time for making strategic decisions going forward.

Very actively improve their services on their own, trying to outpace FinTechs. The feasibility of this option is based on their existing customer base and industry experience but might be hindered by their outdated processes/systems and a mismatch of corporate culture.

Expanding rapidly through FinTech acquisitions to be able to offer improved services soon and to outpace any rivals trying to change these services on their own. This approach retains control and revenue, as well as giving the best experience to customers. However, this approach also involves high risks, as it will require investing in FinTechs before they have proved their viability. Also, integrating a FinTech into an organisation that is very different in terms of culture may turn out to be a challenge difficult to meet.

Each financial service provider has to choose the best future strategy today.